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[1996] UKSSCSC CFC_6910_1995 (03 July 1996)

R(FC) 1/98

Mr. J. Mesher CFC/6910/1995

Income - calculation of earnings - whether payment during assessment period for holiday to be taken outside that period to be included

The claimant's husband was in full-time employment and was paid weekly. The period over which his earnings were to be assessed was the six consecutive weeks immediately preceding the date of claim. The claim was made in the week beginning 23 October 1994. In the final week of the period of assessment he received additionally two weeks advance pay for holiday to be taken after the end of that period. The adjudication officer, relying on regulations 14(1) (as amended from 12 April 1994) and 19(1)(b) of the Family Credit (General) Regulations 1987, included the holiday pay as part of the earnings received in the assessment period and used the whole amount in calculating average weekly earnings. The tribunal allowed the claimant's appeal holding that regulation 18(1) of those regulations had the effect that only one third of the final week's payment should be taken into account. The adjudication officer appealed.

Held, allowing the appeal, that:

the main purpose of regulation 14 was to fix what was to be the assessment period in any particular case. The requirement in regulation 14(1) that normal weekly earnings were to be determined "by reference to" earnings received in the assessment period established the category of payments which were potentially relevant when making the detailed calculation. It was not to be taken as a requirement that all such payments received must be taken into account;

regulation 20 was concerned with the detailed calculation of average weekly net earnings. That regulation specified that the earnings to be "taken into account" in the case of an employed earner were to be those derived from employment during the assessment period. Regulations 20(1) and (3) required the exclusion from the calculation of earnings received within the assessment period but earned in respect of a pay period outside the assessment period. CSFC/7/1994 was followed albeit that that decision had considered the regulations as they were prior to 12 April 1994. Regulation 20 had not been amended on 12 April 1994 to correspond with the amendment to regulation 14(1);

it was unnecessary to consider regulation 18 and in so doing the tribunal had erred in law.

The appeal was remitted to a new tribunal with directions.

[Note: Regulations 14(1) and 20(1) and (3) were further amended from 7 January 1997 by the Disability Working Allowance and Family Credit (General) Amendment Regulations 1996, SI 1996 No. 3137.]

DECISION OF THE SOCIAL SECURITY COMMISSIONER

The adjudication officer's appeal is allowed. The decision of the Doncaster social security appeal tribunal dated 18 April 1995 is erroneous in point of law, for the reasons given below, and I set it aside. The appeal is referred to a differently constituted social security appeal tribunal for determination in accordance with the directions given in paragraph 18 below (Social Security Administration Act 1992, section 23(7)(b)).

The facts of this case are simple and not in dispute. Unfortunately, the regulations which control the legal result are in a very confusing and unsatisfactory state, and my view on their effect has changed several times during the course of considering the appeal. I sympathise with the claimant's view that a great deal more money has been spent on avoiding paying her what she feels morally entitled to than it would have taken to pay that amount. I have decided that the claimant is substantially right in law, but regret that I cannot give the final decision myself, so that another hearing before a new appeal tribunal is necessary.

The relevant claim for family credit was made on 25 October 1994, before the expiry of her existing award, apparently on 21 November 1994. The claimant's husband was in full-time employment and was paid weekly. Details were obtained of the payments made to him by his employer on 15 September 1994, 22 September 1994, 29 September 1994, 6 October 1994, 13 October 1994 and 20 October 1994. There was some variation in the amounts of gross pay and deductions in the first five weeks, but not anything unusual. However, the payment made on 20 October 1994 was very much larger because it included two weeks advanced holiday pay.

In the terms used in the Family Credit (General) Regulations 1987, the week of claim was therefore the week beginning on Sunday 23 October 1994. The adjudication officer applied regulation 14 with the amendment which had been made with effect from 4 October 1994. The effect of that amendment was that, in the case of someone paid weekly, the period over which earnings have to be assessed is the six consecutive weeks immediately preceding the week of claim (i.e. the six weeks for which information was received). Then regulation 14(1) requires the person's normal weekly earnings from employment to be determined by reference to the earnings from that employment received in the assessment period. Regulation 19(1)(b) defines holiday pay as earnings, unless payable more than four weeks after the termination of employment. The adjudication officer therefore included the whole of the net payment received on 20 October 1994 as part of the earnings received in the assessment period and used the whole amount in calculating average weekly net earnings. I do not think that it is disputed that, if that was right, the way that the resulting figure of £153.91 was reached was correct. That would lead to an entitlement to family credit of £9.15 per week, which is what the adjudication officer awarded from 22 November 1994 for 26 weeks.

The claimant appealed, arguing that it was contrary to common sense, when trying to reach a figure of normal weekly earnings, to treat the total payments received in the assessment period as representing six weeks earnings rather than eight weeks. The appeal tribunal on 18 April 1995 agreed. It decided that, since the payment made on 20 October 1994 was paid in respect of three weeks, regulation 18(1) of the Family Credit Regulations had the effect that only one third of that payment should be taken into the total of earnings received in the assessment period. The result of that was to produce a figure for average net weekly earnings of £120 and an entitlement to family credit at the weekly rate of £32.89.

The adjudication officer was granted leave to appeal to the Commissioner by the appeal tribunal chairman. An oral hearing of the appeal was granted at the claimant's request. Unfortunately, she was not able to attend the hearing, but her letter saying so did not get through to the right people within the Commissioners' office until the hearing had taken place. I therefore gave the claimant the opportunity to make a further written submission, particularly on some new points raised at the oral hearing. It has taken some time for the file to make its way back to me after that submission was received and the adjudication officer had had the opportunity to comment. At the oral hearing the adjudication officer was represented by Mrs. Susan Rabas of the Office of the Solicitor to the Department of Social Security. I am grateful to Mrs. Rabas for her even-handed approach and for bringing to my attention some earlier decisions which were relevant to the claimant's case.

There had been a detailed written submission (dated 27 July 1995) by the adjudication officer. That submission sets out the relevant parts of the Family Credit Regulations, so that I shall not do so again. The submission was that the appeal tribunal was wrong to rely on regulation 18 and that Commissioner's decision CFC/42/1992 specifically supported that conclusion.

I agree that the appeal tribunal erred in law in basing its decision simply on regulation 18, but consider that it was right, for different reasons, not to accept the position put forward by the adjudication officer. In order to explain both parts of that conclusion I need to go back to the Family Credit Regulations as they stood before the amendment of regulation 14 with effect from 12 April 1994.

The chain then went like this where the form of income concerned was earnings from employment as an employed earner. Regulation 14 defined the earnings which could be looked at in determining normal weekly earnings as the "weekly earnings from that employment over the assessment period relevant to his case". Mrs. Rabas referred me to the decision in CSFC/7/1994, where the assessment period covered the months of July, August and September 1993. Because of a dislocation of pay arrangements, the employer paid the June salary with the July salary, and some June allowances with the August salary. The Commissioner held that the June salary and allowances fell outside regulation 14. He took the view that regulation 14 applied to the sums earned from the relevant employment over the assessment period, so that the sums earned in June were excluded, and that that was consistent with the reference in regulation 20(1) to the average weekly net earnings derived from the employment as an employed earner during the assessment period. I shall come back later to some other points made in CSFC/7/1994.

The next link in the chain is regulation 20. I need to set out paragraph (1), leaving out the parts applying only to cases where earnings have to be estimated:

"20(1) For the purposes of regulation 14 (normal weekly earnings of employed earners) the earnings of a claimant to be taken into account shall be his average weekly net earnings derived from ... his employment as an employed earner ... during the assessment period relevant to his case ... and those weekly net earnings shall be determined in accordance with the following paragraphs."

Then paragraph (3) provides that net earnings are to be calculated "by taking into account his gross earnings from that employment over the assessment period", less deductions for income tax, social security contributions and half of pension contributions. And paragraphs (5) and (6) provide a method for converting the net earnings for the pay periods in the assessment period into a figure of average weekly net earnings. Those paragraphs contain a mechanical rule for discarding pay periods where the net earnings are more than 20% higher or lower than the initial average.

The Commissioner who decided CSFC/7/1994 did not need to consider regulation 18. That was considered in CSFC/3/1994, which was also specifically concerned with a problem of holiday pay prior to 12 April 1994. The claimant was paid fortnightly. The assessment period was a period of three consecutive fortnights in the seven weeks before the week of claim. The sum received in the third fortnight was about three times as much as in the earlier two, because it contained holiday pay and a retainer for the coming eight weeks of school holiday. The Commissioner, having noted (as cannot be in dispute) that holiday pay and the retainer fell within the definition of earnings in regulation 19(1), held that under regulation 18 the third payment was made in respect of eight weeks and that the effect of regulation 18 was that the weekly amount to be taken into account was one eighth of the payment. He expressly differed from the decision in CFC/42/1992 that regulation 18 was not relevant where in one week an employee received both one week's wage and one week's holiday pay. There are some practical difficulties in the solution adopted in CFC/3/1994. In particular, it cannot have been right to divide the whole of the third payment by eight when it comprised not only the eight week retainer, but also holiday pay and a fortnights ordinary pay. The Commissioner expressed the view that:

"holiday pay is, as a matter of ordinary language, paid in respect of the period of the holiday in question, and a retainer in respect of the period of absence over the school holidays of the employer is clearly in respect of such a period."

I agree, but that would have required a breakdown of the third payment into its elements before the weekly equivalent of each element could be calculated. I reject, in cases where a paid holiday is taken, Mrs. Rabas's submission that holiday pay is derived from employment in the pay period in which it falls due to be paid.

I do not need to go into too much detail on CSFC/3/1994, because, with respect to the Commissioner, it seems to me that the solution using regulation 18 was both artificial and unnecessary. I find the reasoning in CSFC/7/1994 more attractive in linking together the regulations as they stood before 12 April 1994. I follow that decision, which established a consistency of approach in regulations 14 and 20, and, as the Commissioner noted, avoids an inequitable result. Therefore, I also respectfully decline to follow CFC/42/1992, where the Commissioner did not expressly consider the analysis of the regulations which was later adopted in CSFC/7/1994. Given that holiday pay (except I think accrued holiday pay which is paid although a holiday has not been or is not going to be taken) is to be regarded as paid in respect of the period of holiday in question, I do not see why holiday pay in respect of a period outside the family credit assessment period should not have been treated exactly as the Commissioner treated the June salary and allowances in CSFC/7/1994. There is a somewhat Delphic sentence in that decision, where the Commissioner says that his interpretation is "consistent with there being a special provision for holiday pay which would not otherwise have fallen within that wording [i.e. the reference in regulation 20(1) to the average weekly net earnings derived from the employment as an employed earner during the assessment period]". I am not sure what special provision for holiday pay the Commissioner is referring to. Its specific inclusion in the category of earnings does not entail a particular payment being treated in any particular way. I do not read the sentence as opposed to treating holiday pay within the general principle adopted in CSFC/7/1994.

What is the impact on that consistency of approach of the amendment taking effect on 12 April 1994, when regulation 14(1) took its present form, applying to "earnings from that employment received in the assessment period relevant to his case"? On that date there was no corresponding amendment to regulation 20. Paragraphs (1) and (3) remain in the form set out in my paragraph 9 above. In paragraph 12 of CSFC/7/1994 the Commissioner said that the amendment to regulation 14(1) "clearly has the effect that all earnings received in the assessment period are to be taken into account irrespective of the period in respect of which they were earned". Mrs. Rabas for the adjudication officer submitted that that was now so throughout the calculation of normal weekly earnings and average weekly net earnings. I reject that submission. The expression of view in CSFC/7/1994 was very firm, but the Commissioner there was rejecting the submission that the regulations before the amendment of 12 April 1994 should be interpreted as though the amendment had already happened. He was not having to apply the new state of the regulations to a concrete set of circumstances. It seems to me that the amendment to regulation 14(1) has introduced a new inconsistency into the pattern of the regulations, which I must deal with.

The position is that regulation 20, which is concerned with the detailed calculation of average weekly net earnings still specifies that the earnings to be "taken into account" in the case of an employed earner are to be those derived from employment during the assessment period. When paragraph (3) provides that net earnings shall be calculated by taking into account gross earnings from the employment over the assessment period and then making prescribed deductions, it is clearly specifying precisely the gross earnings to be used in the calculation. In paragraph (5) the averaging process is to be carried out on net earnings as calculated under paragraph (3). I have already concluded that the Commissioner in CSFC/7/1994 correctly decided what the phrases in regulation 20 meant before 12 April 1994. Did that meaning change on 12 April 1994 because of the amendment to regulation 14? I do not think that it can have. In my view, regulation 20(1) and (3) still requires payments of earnings received within the assessment period but earned in respect of a pay period or periods outside the assessment period not to be taken into account in the calculation of average weekly net earnings.

It seems to me that the main purpose of regulation 14 is to fix what is to be the assessment period in any particular case. Paragraph (1) now provides in the case of employed earners that normal weekly earnings are to be determined, by reference toll earnings received in the assessment period. The words, by reference toll in that context seem to me to indicate no more than that all payments of earnings received in the assessment period are to be looked at when determining normal weekly earnings. They establish the category of payments which are potentially relevant when making the detailed calculation, but they do not in themselves require that all such payments received must in all circumstances be taken into account in the detailed calculation. Regulation 14(7)(a) provides for earnings to be calculated in accordance with Chapter III of Part IV of the regulations, which includes regulation 20. I consider that the detailed calculation is to be carried out according to regulation 20, as interpreted above.

Does that mean that the amendment to regulation 14(1) in April 1994 was of no practical effect? If the answer is yes, that would not necessarily alter my view, because it could merely indicate that the amendment was made on a misconceived basis. But I do not think that the answer is yes. The amendment does change the definition of the earnings which can potentially form part of the calculation. Assume a situation where for the first two weeks of a six week assessment period the employee was absent from work on paid holiday and the earnings for those two weeks were paid to the employee with the last week's wages before the beginning of the assessment period. Before 12 April 1994 regulation 14(1) would have required the determination of normal weekly earnings to be made by reference to the earnings for the two weeks of holiday, because those earnings formed part of the earnings from employment over the assessment period. From 12 April 1994 the result would be the opposite because the earnings for the two weeks of holiday were received outside the assessment period. Whether that result is in accord with the policy intention is not a matter for me. It does not render the system of calculation unworkable, because, if there are pay periods within the assessment period in which there are no earnings which can be taken into account, those pay periods will no doubt be excluded through the operation of the process in regulation 20(5).

I should also deal briefly with the place of regulation 18. The construction of regulations 14 and 20 which I have adopted leaves no role for regulation 18 in relation to the earnings of employed earners. The operation of those two regulations produces at the end a figure of average weekly net earnings and there is no need to carry out the arithmetical calculation in regulation 18. Yet regulation 18(1) still expressly applies for the purposes of regulations 14 and 16. I think that the answer is that until the substitution of the whole of regulation 14 and the addition of new paragraphs to regulation 20 on 7 April 1992, the determination of normal weekly earnings was controlled by regulation 14. Regulation 14 prior to 7 April 1992 would produce a figure for earnings over the relevant period, but regulation 18(1) was needed to convert that figure into a weekly amount. The current reference to regulation 14 in regulation 18(1) seems to be left over from that earlier state of the legislation. It is not any indication that my construction of the current form of regulations 14 and 20 is wrong.

The upshot of all that is that the appeal tribunal of 18 April 1995 adopted a wrong legal basis in relying on regulation 18 of the Family Credit Regulations. I am afraid that I cannot decide that the decision should nonetheless be upheld, or substitute my own decision on the basis of the facts found by the appeal tribunal. That is because there was no breakdown of the figure of £372.94 net pay received on 20 October 1994 (gross £436.30) between the "ordinary" week's pay received then and the two weeks' advanced holiday pay. The appeal tribunal simply divided the total by three, using regulation 18. The effect of my legal ruling is that, on the assumption that the two weeks to which the holiday pay related fell outside the assessment period, the holiday pay is to be excluded from the calculation under regulation 20. A simple division is not acceptable for that purpose, because there may have been overtime or other payments in respect of the ordinary week's pay and the holiday pay may have been at a basic rate only. There was no evidence before the appeal tribunal about that. Rather than trying to get that evidence so that I can give the decision, I hope that it will be quicker to refer the case to a new appeal tribunal which will be able to receive and consider that evidence.

Accordingly, the decision of the appeal tribunal dated 18 April 1995 is set aside as erroneous in point of law. The appeal is referred to a differently constituted social security appeal tribunal for determination in accordance with the following directions. Before the rehearing the adjudication officer is to obtain from claimant's husband's employers a breakdown of the payment made to him on 20 October 1994 as between the amount of earnings normally due to be paid on that date and the amount of advanced holiday pay, and if possible a statement of the dates of the weeks of holiday in respect of which the holiday pay was paid. That information is to be included in the papers for the rehearing, so that the claimant has an opportunity to study it and to put in evidence of her own if she thinks that it is inaccurate in any way. The new appeal tribunal is then to apply the legal approach set out above, that all the payments of earnings received in the assessment period fall within regulation 14(1) of the Family Credit Regulations, but that in carrying out the calculations of average weekly net earnings under regulation 20 only earnings earned from the employment over the assessment period are to be taken into account. Holiday pay, where a period of paid holiday is actually taken, is to be treated as earned over and in respect of the period over which the holiday is taken.

Date: 3 July 1996 (signed) Mr. J. Mesher

Commissioner